Archives for May 2021

JSE-listed REIT, Redefine Properties, has reported a lower distributable income per share of 26.2c for the interim period to 28 February 2021, driven principally by the impact of Covid-19 on the property sector and broader economy. However, the company is in a strong position to benefit from an anticipated uptick in property fundamentals as conditions begin to improve in line with the expected vaccine rollout in the latter half of the year.

The current reporting period covers six months during which the economy was battered by one of the world’s strictest lockdowns. Consequently, when compared with a pre-Covid prior reporting period, the distributable income is down 21.8%.

CEO Andrew Konig says while the jury is out on the exact point at which the upward cycle will begin, an improvement back to pre-Covid levels should take place once vaccines are broadly rolled out.

“We believe the bottom of the cycle has been reached. What we are expecting – and this is also what has happened in other countries who have made good strides on their vaccine programmes – is that the rollout of vaccines will lead to more mobility in the system. This means more people going out, to work, to shop and to play and that quickly translates into confidence, which is the cheapest form of economic stimulus,” he says.

Konig says until an accelerated turnaround begins, however, weaker property fundamentals and low economic growth have to be factored in for 2021 and beyond.

As a precautionary measure ahead of a still nascent vaccine rollout in SA, Redefine’s board has decided to take the prudent step to defer its dividend decision to year end.

“We did not take this decision lightly at all and took all stakeholder interests into account. It is fundamental to our investment proposition to pay dividends, but unfortunately there is just too much uncertainty to factor in right now. We hope to have better news towards the end of the year, but as always we must act prudently,” he says.

Ntobeko Nyawo, Redefine’s new CFO, says Redefine is in a strong position to benefit from future growth thanks to its focus on managing risk and optimising its balance sheet. At the previous year end, Redefine’s loan to value ratio (LTV – a key indicator of balance sheet risk) was at 47.5%, but by half year it was reduced to 44.3%.

“We have continued to strengthen our balance sheet, through disposal of non-core assets. By doing the right things now we have access to ample liquidity (R4.8 billion) and achieved a pleasing 98% of gross billings in collections. Our net asset value per share also increased to 719.74 cents per share. This means our business has remained highly cash generative, despite the pandemic,” he says.

Apart from the obvious Covid-19 impact, he says the decrease in revenue for the period was largely attributable to the deconsolidation of European Logistics Investment B.V. (ELI) during the second half of 2020, the sale of Leicester Street and the disposal of non core local properties during the period. Dividends were also not forthcoming from Redefine’s 45.4% holding in EPP, who acted to preserve financial flexibility and bolster their own liquidity.

Chief Operating Officer, Leon Kok, says Redefine managed to deliver positive outcomes during a difficult six months, thanks to its strategic intent of repositioning the asset platform to maintain relevance.

“We focused on execution and this half is a clear demonstration of our strategy delivering the desired outcomes,” he says.

Redefine’s total property assets under management are valued at R75.3 billion, with 84% invested in SA.

Kok says concluded non-core property asset disposals realised R4.0 billion, with a further R2.7 billion currently at an advanced stage.

“A further highlight was the completion of two new local logistics developments totalling R229.7 million, while the estimated cost of a new domestic retail and a logistics development in progress totals R293.2 million,” he says.

Konig says the 16% of the portfolio now held offshore incorporates the recent sales of non-core assets like student accommodation in Australia, but he expects the offshore portfolio to grow through continued development expansion in the Polish logistics platform.

“There will be an uptick – we just do not know how aggressive it will be. However, in Poland, the strong economic fundamentals mean they could bounce back to pre-Covid levels far quicker. In SA, it might take longer as the local economy was already fragile going into the Covid-19 crisis,” he says.

Redefine is focusing on expanding into the logistics space through development locally and in Poland. It completed two local logistics projects and in Poland, where 67,343 sqm were completed at a cost EUR40 million, with developments under construction of 173,240 sqm, at a cost of EUR120 million.

Significant land holdings in strategic locations like Cape Town and Johannesburg will be harnessed for the local development. Konig says this growth will not be done speculatively, but rather through on-demand development for tenants.

Redefine’s results paint the picture of a fairly stable retail and industrial space, but with offices struggling with weakened demand and oversupply of space.

“What we have found is there is a flight to quality, with key locations and conditions proving more defensive and attractive,” says Konig.

Redefine is positive that some normality will return to the office space despite talk of far less demand in a “new normal”.

“Young people wanting to learn and be mentored are suffering the most. Corporate ethos and culture as-well-as collaboration also can’t be properly nurtured. Some service sectors like banking are also bemoaning the slip in turnaround times. I think this is why more people want to return to an office environment, and why a more hybrid model is likely. A 100% work-from-home simply does not suit a fully productive, engaged and connected workforce,” says Konig.

“Our results reflect the important strides we are making in the creation of a more inclusive, sustainable and resilient operating context. Covid-19 has provided us with a unique opportunity to reset every aspect of what we do and the execution of our strategic priorities will position Redefine for the eventual upward cycle,” concludes Konig.

For further information on Redefine’s interim results please visit our website:
https://www.redefine.co.za/investors/financial-results/2021-results/interim

• Distributable earnings up 8.5%
  • Distributable earnings per A-share up 2.9%
  • Distributable earnings per B-share up 16.8%

• Contractual rental income up 1.8%
• Combined NAV per share up 4% to R10.59
• Loan-to-value ratio decreased by 11% to 35.7%
• Interim dividend comprising 100% of distributable earnings declared
  • 02 cents per share for A-share holders
  • 10 cents per share for B-share holders

South-African focused JSE-listed diversified REIT, Dipula Income Fund, today announced robust results for the six months ended 28 February 2021. The Group’s solid performance was achieved against a backdrop of weak trading conditions globally and in South Africa (“SA”), as the country is negotiating the negative economic impact of Covid-19 restrictions.

Izak Petersen, CEO, commented:

“We are pleased with our performance under extremely challenging trading conditions. Our hands-on asset and property management, combined with our defensive portfolio were the differentiating factors in these unprecedented times. FOR IMMEDIATE RELEASE “Distributable earnings were up 8.5% to R275 million from R254 million in the comparative period which resulted in an upsurge of 16.8% in the B-share distributable earnings to 45.10 cents per share. A-share distribution growth was 2.9% or 59.02 cents per share.”

The Group reported growth and improvement in most metrics for the reporting period. Contractual rental income for the period increased organically by 1.8% to R538 million (2020: R529 million) and property related expenses were well contained, increasing by a mere 1.6% to R219 million (2020: R216 million). Dipula’s cost-to-income ratio was stable at 36.7% (2020: 36.3%).

The Group reported net property income of R457 million (2020: R461 million) after the provision of rental relief to tenants of R8.2 million during the reporting period, which was over and above R49 million provided in the previous financial year ended 31 August 2020.

“Our prudent balance sheet management aided in the 11% reduction in the loan-to-value ratio to 35.7%,by the end of period. This strengthened our balance sheet, thus positioning us well to navigate these difficult times and be in a position to pay dividends to shareholders,” Petersen remarked.

A-shareholders will be paid an interim dividend of 59.02 cents per share , and B-shareholders 45.10 cents per share.

Dipula was comfortably within its strictest loan covenant levels of 45% loan-to-value (“LTV”) and 2 times interest cover ratio (“ICR”) at period end, with its LTV at 35.7% and ICR at 3.18 times.

The Group’s property portfolio remained stable at R9 billion, consisting of 189 properties (2020: 190 properties) with a total gross lettable area (“GLA”) of 923 964m2 (2020: 916 593m2). 136 new leases totalling 25 648m2 in GLA were concluded at an average escalation of 7.7% and a weighted average lease expiry (“WALE”) of 3.4 years, representing R138 million in lease value.

Renewals comprised 44 114m2 of leases with a WALE of 2.5 years, amounting to gross lease income of R191 million over the lease term.

77% of tenants were retained during the period (2020: 80%). The Group recorded a negative lease reversion rate of 4.8% as a result of challenging market conditions.

 

Vacancies were 7.6% at period end. The Company had made good progress in moving some of these vacancies, which are believed not to be of a structural nature.

“We are making progress in refinancing our expiring debt, with R590.5 million having been refinanced by the end of the period. We have no foreign currency debt exposure and 61% of our interest rate exposure was hedged at the end of the period. We are negotiating on R320 million of debt facilities which expire in the current financial year and hope to soon conclude terms on those,” Petersen stated.

Due to uncertain trading conditions, Dipula’s board have at this stage not provided guidance for the full year performance of the Group.

“Notwithstanding current challenges, Dipula continues to take advantage of opportunities in the market and will capitalised on these as much as possible. Going forward, our teams will continue to demonstrate resolve and a pragmatic approach to the management of our business. We aim to deliver sustainable total returns to our shareholders and believe we have a resourceful team that will deliver growth by focusing on matters within our control,” Petersen concluded.

Spear REIT Limited (SEA:SJ), with its exclusive focus on high quality Western-Cape only assets, released its FY2021 results on 14 May 2021.

Despite a period of tenant cashflow constraints due to Covid-19 and the national lockdown, deferred rental payment arrangements and a contraction in the local (and global) economy, Spear announced a final distribution per share (DPS) for FY2021 of 58.70 cents per share based on an 80% pay-out ratio and a full year rental collection rate of 97.79%. In addition to robust business performance under the circumstances, Spear launched a Covid-19 feeding scheme from its Double Tree by Hilton Hotel kitchen which ran from April 2020 – July 2020 providing daily warm meals to the less fortunate and feeding more than 50 000 people over this time.

“Although 2020 has been something of a wartime environment for businesses globally, the Spear team has navigated this time with agility and commitment, which is reflected in our 97.79% rental collection rate and FY2021 results, says CEO Quintin Rossi.  “Our founding principles of being regionally focused and hands-on managers of our assets has helped us maintain high occupancy rates across a diversified portfolio.” Spear’s hands-on asset management and defensive asset diversification strategy played a key role in its FY2021 results with 54% of the portfolio by gross lettable area (GLA) comprising industrial assets.

Spear’s portfolio consists of 32 high quality, 100% Western Cape investment properties ranging from modern logistics, convenience retail, mixed-use and strategically located commercial office blocks. At year end Spear’s portfolio value was R 4,5 billion over a gross lettable area of 453 458m². Spear has maintained an impressive occupancy rate over the year of 94% with in-force average escalations of 6.81%.

Management successfully reduced overheads during the year, which saw an overall reduction of net administrative cost-to-income from 5.71% to 5.48% due to aggressive controllable expenditure reductions, salary sacrifices and board fee reductions during the year.

Rossi says that “despite the severe impact of Covid-19 on the commercial real estate sector, with the SA REIT association estimating that close to R3bn in relief packages had to be provided to tenants across the listed property sector, our DPS decline was relatively controllable thanks to our asset diversification strategy in commercial, industrial, retail, residential and mixed-use/hospitality assets.” Spear’s Western Cape focus continues to pay off as income statement continuity and balance sheet management has ensured the business remained sufficiently capitalised and met all its covenants. Spear’s LTV at year end was 45.81%.

The FY2021 results are a feather in the cap of the Spear asset management team as portfolio leasing and retention was successfully executed under the circumstances. A total of 187 610m² renewals/relets were concluded for the year with an average rental reversion of -3.70%. During the year, two 10-year development lease and extension agreements were concluded for a division of Grindrod Logistics and Nampak Limited totalling 30 000m².

Spear’s average property value is R 139 million compared to FY2020 of R 129 million. The portfolio remains conservatively valued at R 9 816/m², which remains below numerous benchmarked industry peers with similar portfolio compositions. Fair value devaluations for the reporting period were R 106 million. FY2021 valuations reflects a portfolio exit capitalisation rate of 9.25%. One third of the portfolio is valued annually by a JSE accredited, independent valuer with the balance valued by managements internal qualified valuer. Spear’s shares in issue net of treasury have increased to 205 733 231 translating into a SA REIT tangible net asset value per share of R 11.21 net of its final FY2021 distribution.

Spear’s LTV at year end was 45.81% (bank covenants at 55% LTV) with an amount of R 85 million gross debt being settled during FY2021. Spear’s average costs of debt declined by 149bps during FY2021 to 7.26%. Currently 56.5% of gross debt is hedged at an all-in cost of 8.66% and 43.5% of gross debt is variable at an all-in cost of 5.66%. Spear’s debt maturity profile is robust with zero refinancing risk to the business.

Industrial

Spear’s industrial portfolio (243 162m²) offers a diversified mix of well-established industrial nodes consisting of mini, mid and large modern logistics units. Rental collection was 96.70% thanks to the easing of operating restrictions from Level 4 of the national lockdown onwards. Occupancy was 97.54% at year end. 154 971 m² was renewed/relet with a 1.88% positive rental reversion.

Commercial

Spear’s commercial office portfolio (141 867m²) had notable vacancies because of Covid-19. Management’s focus remains on reducing vacancies through a tenant-centric approach and regional expertise. Although the future of work and the workplace are arguable key unknowns, all the evidence suggests that a strong demand for commercial office will return. Occupancy was at 86.96% at year end. 23 012m² was renewed/relet with a negative rental reversion of 1.79% with rental collections for the year at 96.70%.

Retail

Spear’s retail portfolio (40 351m²) consists of two open air convenience centres anchored by national grocers and numerous national line shop tenants. Most of Spear’s larger retail tenants were able to trade throughout the lockdown except for tenants like restaurants, coffee shops and gyms. Management’s approach was to be pragmatic, focusing on business continuity throughout the pandemic. Because Spear’s retail assets allow ample room for social distancing, a fast recovery is expected. Occupancy was at 99.6% at year end, with a collection rate of 95.58%. 9 628m² was renewed/relet with a negative rental reversion of 8.80% with rental collections for the year at 95.58%.

Hospitality

Management excluded any hospitality revenue from its income forecasts for FY2021, given the uncertainty of when unrestricted travel would return. Although there was a gradual increase in trading from September 2020 with a positive outlook for the festive season, this was hampered by South Africa’s second wave of Covid-19 infections.  The local and global vaccination rollout will be tantamount to the recovery pace of the hospitality sector. Local market penetration has been successful as regional business travel and regional leisure travel has recommenced. Smaller group meetings and accommodation business has been on the increase as economic activity increases.

As announced on SENS, management has entered into a fixed income lease agreement over the 15 on Orange Hotel with industry doyens The Capital Hotels & Apartments Group, which will further reduce Spear’s exposure to variable portfolio income and will have a restorative impact on group earnings during the second half of FY2022.

Outlook and guidance

Management’s guidance for FY2022 is a DPS growth of 6% – 8% per share from FY2021 (based upon a no less than 80% pay-out ratio). This guidance is based on assumptions that include ongoing macroeconomic recovery, no third or fourth wave lockdowns, lease renewals per company forecasts, no major tenant failures, an improved trading environment that includes international travel, and a successful rollout of the Covid-19 vaccine with a high efficacy rate.

Management and the board remain significantly invested in Spear and are fully aligned with shareholder interest. Management remains focused on rental preservation and growing cashflows as its hands-on asset management and tenant centric approach remains key to its operating strategy.

“Although the longer term economic effects of the pandemic on the real estate sector are difficult to predict, we are seeing signs of recovery as retail sales increase and restaurants, destination retail malls and airports become busier and busier, says Rossi. “I am incredibly proud of how in the face of a global pandemic and economic shutdown Spear’s portfolio occupancy rate has been 94% in FY2021 and our rental collections have been as robust as they have been to date. Our north star remains to be an authentic dividend paying REIT with a clear strategy to grow the Western Cape portfolio to a meaningful mid-cap size of R 15 billion with a market cap of R 10 billion over the next 5 years. We will however never sacrifice quality for quantity as we move closer to our asset value targets.”